A very interesting article in Barrons[1] about the role ETFs — Extremely Troublesome Funds — played in the May 6th flash crash. It seemed the usual liquid, widely traded funds had a sudden and unexpected vulnerability, as liquidity dropped steeply, and bids faded away.

“ETFs represented 70%, or 227, of the 326 securities for which trades were cancelled by the exchanges, owing to a price drop of 60% or more, according to a recent joint report issued by the SEC and the Commodity Futures Trading Commission. That was after many exchange-traded funds lost ground, along with stocks, earlier in the day because of the problems in Europe caused by Greece.

Investment Technology Group, an electronic broker and tech firm, says that, at the height of the flash crash, the returns of some ETFs decoupled from the underlying basket of stocks that they track. Some underperformed the underlying portfolios by more than 60% . . .

So how bad is the damage to the reputation of exchange-traded funds? Consider some ETF trading details: